Friday, February 27, 2009

The Anti-Stimulus

Imagine you’re unemployed – that shouldn’t be too difficult. You’re unemployed, or perhaps you own a business and business is very, very slow. Negative-cash-flow slow, and every indication is that this isn’t you grandmother’s cyclical downturn. Would this be a good time to go out and buy a bunch of new equipment? Remodel the house? Maybe you decide you want to borrow money to give rebates to your customers. Good idea?

Hardly. Most business owners, when faced with such a slowdown, will cut back. Unless they are really cash fat, and there are compelling bargains to be had in the employment of capital, they’re going to cut every expense possible, hold off on capital expenditures as much as possible, and carefully manage their resources by investing in ways to generate revenue. That’s sound business.

The bad news is that the Stimulus Package we’re all paying for takes the first approach: it doesn’t invest in growth; it spends on maintenance, and dubiously at that. Worse, it borrows money to do it – money that you and I and our children will have to pay back. In business, this approach would be considered a dicey bet at best and suicide at worst.

This would be bad business even in good times. In times of economic crisis – negative GDP and wholesale debt deleveraging – it’s deadly. The only way a business (or an economy) can grow out of a recession or depression is to grow: innovate, invest, cut costs, dispose of useless assets, and generate business. The absolute worst thing that can be done to a business in crisis is to drain its capital on maintenance of its outmoded plant and business model, and dubious expenditures. But this is what the stimulus package does to the American economy.

Of course the government is not a business owner. It has no real accountability to anybody, and it makes the laws that we all must obey. It therefore cannot be expected to make sound business decisions, either for itself or – much more importantly – for anyone else. This is another way of stating the myriad dangers of government.

Government is not an entrepreneurial animal, nor will it ever be. It is a servant, and the sort of servant that needs to be kept in chains with a gun trained on it. The founders understood this. It is not, therefore, an engine of economic growth. In fact, it is the opposite – it is and always will be a prime inhibitor of economic growth – the enemy of innovation, efficiency, creativity. Government is a necessary evil, and the less of it, the better. Would you hire a rogue to manage your investment portfolio? You do when you entrust the government with such duties as it’s not and never will be fit to carry out: managing an economy.

The sorts of things that make a vital economy are done at the individual level. Creativity, innovation, task-specific management. The profit mandate built into all legitimate businesses ensures this. It follows, then, that the way for a government to “stimulate” economic health, vigor, growth, and innovation – and hence, employment and tax revenues – is by, first and foremost, getting out of the way of the entrepreneur. Is the entrepreneur having a hard time getting credit? Then let him keep more of his income to invest in his business. Is he forced to lay people off? Then give him meaningful tax breaks for innovation and investment, for generating revenue. Why would you suppose that taxing him and his customers and his children – reducing the capital base of the economy – would “stimulate” anything except malaise?

It won’t, of course. It could, however, be the shark infestation that dooms the survivors of the shipwreck. Sucking capital from a struggling economy is going to “stimulate” it about as well as a baseball bat to the kneecaps would stimulate someone who’s just been hit by a bus. The picture is no exaggeration: a recession can be bludgeoned into a depression, and the way to do it is to usurp capital for nonproductive spending and inhibit individual business activity. It only puts you further in the hole, and does nothing to bring in any income. It leaves you worse off than you were before.